Limitation of Actions Consultation - Law Commission

commencement of the action. Here the trustee, in breach of trust, failed to
accumulate rents received from the trust property for the benefit of the
beneficiary, but applied them in keeping down encumbrances. As the money
spent in this way was not still retained by him, the trustee could claim the benefit
of the six year limitation period.
4.23 An example of notional property held to be still in the possession of the trustee is
provided by In re Howlett, which we have examined above. 51
Here the trustee was
held to be chargeable with an occupation rent and, as he could not show that he
had made any payments of rent to the trust, he was deemed to have the money still
in his pocket.
4.24 Section 21(2) 52
deals with the situation in which trustees distribute trust property
to beneficiaries which include the trustees themselves but, through no fault of their
own, do so wrongly. In that situation, if section 21(1) applied in its full rigour, the
trustees would be exposed to liability without any limitation period, 53
whilst any
claim which the trustees might bring against the other beneficiaries to recover trust
property would be time-barred after six years under section 21(3). Trustees in this
position are partially relieved by section 21(2). Where trustees have retained trust
property as part of their share on the distribution of the trust property, their
liability in any subsequent action taken after the six year limitation period to
recover that property will be limited to the amount they have retained in excess of
their entitlement.
4.25 Suppose, for example, that A is a trustee of a trust and in 1989, believing that A, B
and C are the only beneficiaries, realises the trust property and distributes the
proceeds, totalling £120,000, equally among A, B and C, so that they get £40,000
each. Despite A having taken all reasonable care, there is a fourth beneficiary, D,
who is entitled to an equal share, and commences an action against A in 1996. D’s
claim against A will not be subject to a limitation period, because of section 21(1).
But any claim by A, or by D, against the other beneficiaries, will have become
statute-barred in 1995. Under the provisions of section 21(2), A’s liability to D will
be limited to the difference between the quarter share which A should have
retained for himself from the trust property, and the third share he in fact retained,
i.e. the difference between £40,000 and £30,000. So A’s liability will be limited to
£10,000.
4.26 Trustees will only be able to rely on the provisions of section 21(2) if they can
show that they acted honestly and reasonably in making the original distribution of
the trust property. In addition, this provision does not apply to actions brought to
recover the trust property before the expiry of the limitation period. Up to this
time the trustee would be liable to pay the beneficiary the whole of the share he
should have received out of the original distribution from the trust property
retained by the trustee. The trustee would however be able to seek contributions
51 See para 4.18.
52 Originally introduced by Limitation Amendment Act 1980, s 5(1), on the recommendation
of the Law Reform Committee. See Twenty-first Report (Final Report on the Limitation of
Actions) (1977) Cmnd 6923, paras 3.91 - 3.93.
53 Although laches might apply.
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